'Need a tangible definition of controlling interest'

The pass-through tax treatment provided in Budget 2014-15 for real estate investment trusts (Reits) and infrastructure business trusts is expected to kick-start growth in the real estate and infrastructure sectors. However, the path to recovery has legal potholes, something corporate India should be wary of. Experts share their insights on the issue with Business Standard:

Laying a road map for India's economic recovery, Union Budget 2014-15 emphasised the need to propel growth in India's real estate, infrastructure and construction sectors. The Budget seeks to usher in Reits, the draft regulations for which were unveiled by the Securities and Exchange Board of India in October 2013, in a stable and certain tax environment to enable these to attract investment and meet the increasing need of funds by the infrastructure and construction sectors.

The Reit model envisaged in India has two primary elements:

First, the trust will raise capital by issuing units (to be listed on stock exchanges). Second, the income-bearing assets will be held by a special purpose vehicle (SPV), the controlling interest in which will be held by the trust.

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Though the tax treatment of Reits has been extensively provided for in the amendments/proposals, the following issues merit consideration:

(a) Under the proposed explanation to section 10(23FC), SPV is defined as "an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration". This definition does not provide any tangible definition of "controlling interest". Clause 2(1)(i) of the draft Reit regulations defines "change in control" as "interest, whether direct or indirect, to the extent of more than 50 per cent of voting rights or interest", not controlling interest. Though the term "controlling interest" has gained attention following the famous Vodafone judgment, it remains undefined.

(b) The proposals provide for differential tax treatment for different streams of income at the hands of the unit holder. The distribution of capital gains derived by a business trust shall not be taxable at the hands of unit holders but income by way of interest received from a business trust to unit holders (from the interest income derived by a business trust from an SPV) shall be taxable at the rates applicable to unit holders. This will require one-to-one correlation of payment of income by a business trust with its income.

Amit Singhania
Principal Associate, Amarchand Mangaldas